E-Book Publishers Get Bad News on Pricing Strategy

Government’s E-Book Case Helps Amazon Build Toward a Monopoly (Los Angeles Times)

E-Book Settlement Has Publishing World in Turmoil (Los Angeles Times)

Publishers Settle e-Book Price Fixing CaseIn our past postings on the topic of price, we have often discussed how price is one of the toughest, yet often least understood marketing decisions. Consequently, many marketers often direct limited resources to issues related to this part of the marketing mix. The reasons for relegating price to the lower end of the marketing-decision checklist are numerous. For instance, to some marketers the pricing decision lacks real importance because they think their customers should not be thinking price first; rather they should be sold on product features and the benefits these provide. Others see price as an almost automated process where they just plug in a number to a standard markup equation (e.g., price is always 25% above cost) and whatever number comes out is what they charge.

Other companies, however, take price very seriously. Consider, for instance, how Amazon.com looks at price. For Amazon, price may rank as the most important marketing decisions they make. As the leader in online retailing, Amazon’s pricing strategy is certainly a key component of their success. Just looking at their website visitors will clearly see how price often takes center stage.

Because price is so crucial to Amazon, it was not surprising that they were clearly upset when several major book suppliers decided to get together to change what book retailers charge for their products. In 2010, leading publishers, including HarperCollins Publishers and Simon & Schuster, formed an alliance whereby they intended to limit how low book prices could be set (i.e., floor price). Additionally, retail sellers would only be able to sell these publishers’ books if they agreed to abide by the pricing rules. Of course, Amazon did not like this, nor did the U.S. Government which filed a lawsuit claiming the publishers were conspiring to restrict competition.

As discussed in these stories, a federal court has approved a settlement between the publishers and the U.S. Justice Department on issues related to collusion of book pricing. Specifically, it relates to the pricing of e-books, which the government claimed (and Amazon also argued) was being overly controlled by these companies. In particular, the companies were accused of joining forces to restrict competition by limiting how much e-books can be discounted at the consumer level.

The impact of the settlement has many thinking the bookselling market will never be the same. Some are even taking the position that Amazon is on its way to being a book selling monopoly. While that seems unlikely, this settlement is bound to strengthen Amazon’s position as the world’s largest online retailer.

The idea was (1) to entice Apple, which was just about to bring out the iPad, into the e-book market by guaranteeing Apple a profit on e-book sales, and (2) to create competition for Amazon. Amazon’s $9.99 price often meant it was selling books at a loss, presumably to cement its dominance of a market that it then controlled to the tune of 90%. The publishers imposed the agency model on Amazon, Barnes & Noble and other e-book sellers too. The prices of e-books, which were keyed to the hardcover price, moved up to as much as $14.99.

How exactly will Amazon benefit from this decision? Besides the publishers, who else is likely to be negatively impacted by the decision?

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